Volume Oscillator Indicator : Application & Chart

The Volume Oscillator clarifies whether the volume trend is increasing or decreasing by using the difference between a longer and a shorter moving average of volume. When the Volume Oscillator rises above zero the shorter-term volume moving average has risen above the longer-term volume moving average. This means that the short-term volume trend is higher than the longer-term volume trend. Rising prices along with increased volume, and falling prices along with decreased volume are interpreted to be bullish signals. Conversely, volume increasing as prices fall, or volume decreases as prices rise, is interpreted as a bearish signal.

In technical analysis the Volume Oscillator is used to reveal the difference between two volume moving averages with the objective of determining whether the overall volume trend is increasing or decreasing, as well as evaluating the magnitude of the volume surges (abnormal volume activity).

By analyzing the volume oscillator in parallel with the price movement, a technical analyst can describe the nature of the volume surge as panic selling or as buying motivated by greed.

• When the volume oscillator rises above 1 and the price of a security drops, it is indicating that the number of traders selling in panic is increasing. The higher that the volume oscillator is above 1 during the price drop, the stronger is the panic selling that we are witnessing;
• When the volume oscillator rises above 1 and the price of a security moves up, it means that the number of traders buying in greed increases. The higher that the volume oscillator is above 1 during a price advance, the stronger is the greed-motivated buying that we are witnessing.

The formula used to calculate the Volume Oscillator is

Volume Oscillator = [Fast VMA] / [Slow VMA]

The Volume Oscillator is very similar to the PVO (Percentage Volume Oscillator). The only difference is that the PVO evaluates volume on a percentage scale (from -100% to +100%) with 0% as a center line whereas the Volume Oscillator evaluates volume in absolute numbers with 1 as a center line.